“Private Equity Firm Goes Public — Pays Out Lucrative 9% Dividend”

Solving a teaser from Tyler Laundon at Wyatt's SmallCapInvestor Pro

On a day when the Carlyle Group (CG) is making headlines for their IPO, which was generally received with a “meh” by Wall Street (priced slightly below the range, no pop on the IPO), why not take a look at a different private equity-type stock that’s apparently paying a much higher dividend?

Or at least, that was my reasoning as I sifted through recent teaser emails and this one from Ian Wyatt’s SmallCapInvestor Pro floated to the top. The pitch is from Tyler Laundon, who is apparently one of Wyatt’s analysts, and he says you should “snap up” shares of this stock before it moves higher. Here’s how he gets our ears a-tingling …

“A new private investment, previously available only to the super-wealthy, is now OPEN to self-directed investors …

“With just $15, you can easily get in today and bank big dividends ….

“Out in a leafy hamlet of “old money” Connecticut… down the street from the world’s biggest and wealthiest private equity firms… is the headquarters of a small band of renegade investors bucking the blue-blood establishment.

“They’re turning the tables on their closed-door neighbors — private equity firms that cater only to trustfunders and billionaires — by making their wildly successful firm open to the public.

“Now, any investor, no matter their net worth or portfolio size, can earn big cash payouts from highly profitable deals once available only to the incredibly well-off.”

That’s just what we all want to hear, right? Walking a fine line between “screw the fat cats!” and “I want to be a fat cat, too!”

But basically what’s being teased here is a private equity company, not terribly unlike the Carlyle Group or hundreds of other buyout shops, venture capital firms, hedge fund managers, business development companies, or alternative asset managers that deal with either buying shares of or lending money to private companies.

And yes, I’m sure it’s a lot smaller than mega-famous firms like Carlyle or than the big public names like Blackstone — and it certainly, if that 9% yield is correct, carries a better yield than most of the well-known public companies in this business (Blackstone and Carlyle are both publicly traded partnerships, BX paid out a trailing yield of about 5% over the past year and CG is guiding investors to expect at least 16 cents per quarter, so that’s an expected yield of about 3%).

So who are they teasing?

Well, thankfully for our purposes, we do get some clues — here’s how they hint us up, starting with examples of a few of the profitable “exits” they’ve made in their investing:

“The firm bought a U.S. manufacturer of thermal processing equipment designed to roast, toast, and bake processed goods including human foods, animal feeds, and industrial products. It sold the entire business just 15 months later and netted a $34 million profit.

“When the labor market was hit by a downturn, the firm acquired a business that provided industrial staffing services in 29 states. Then, it turned around and sold the company at the amazing valuation of 8.2x earnings… earning an enormous profit of $89 million!

“The firm bought a California-based company that manufactures high-performance coatings for premium eyewear. Two years later it sold this tech operation at a whopping $39 million profit!”

Sounds pretty good, right? Of course, we don’t have any context about how big or important these deals were, or how often they’re successful, though the tease dos say that they’re “able to do this year in and year out” because they’re “always on the hunt.” One presumes that they’re also “giving 110%.”

More? Here you go:

“Because this firm has 9 lucrative deals in the works… The kind of highly profitable deals I mentioned earlier… that allow it to pay out tens of millions of dollars to investors like you in the form of dividends.

“And that’s why I’m writing you today: So you can get your share of these massive dividends payouts!

“Whether you’re looking to generate income in retirement… pad your portfolio with new money… or earn some extra cash for a vacation to Bermuda… this special “private” equity firm has proven to pay out consistent and sizable dividends…

“Since going public, this firm has NEVER decreased its dividend.”

Licking your lips yet? Cut it out, that’s bad for you — get some chapstick.

But what about those “nine lucrative deals” — what are they talking about?

These are the companies they currently own, we’re told:

“A high-tech operation that makes wafer thin circuit boards — based not in China, but in the Midwest!

“A cash-cranking operation that churns out promotional products for over 40,000 businesses across the country.

“A security company that makes premium home and gun safes – on the surface, a boring investment, but this business increased sales by 27% last year.

“A Florida company that manufacturers top-of-the-line therapeutic supports and beds for the medical industry.

“A low-cost furniture company that produces and sells sofas, sectionals, and recliners.”

And the $1.5 billion number? That’s just what they get when they take the investments in these companies and multiply it by what they say is the average return (81%) on their investment in the “exited” companies (the investments they’ve sold).

And actually, that 81% number will have to come down now — just yesterday they sold one of their portfolio companies, Halo, for $76.5 million. Which was a profitable sale, that’s $14 million more than they paid for the company five years ago, but it will drag the 81% average down substantially. And it won’t generate any earnings for the company this quarter, since they sold it for roughly their estimated book value. HALO was not one of their larger holdings, it generated just 8% of EBITDA in 2011.

Halo, if you’re curious, is the “cash-cranking operation that churns out promotional products” in that teased list above — the other current portfolio companies are Advanced Circuits, CamelBak, Fox Racing Shox, Arnold Magnetic Technologies, Liberty Safe, Tridien Medical, and American Furniture Manufacturing. A couple of those companies were “sold into” CODI by its partner, Compass Group, when CODI went public in 2006, but most of them have been added to the portfolio since then.

That is a very concentrated portfolio, and it means that successful investments can have a pretty dramatic impact on the company — the last “exit” they made before this was a staffing company called StaffMark that they sold last Fall for a recognized profit of something like $80 million. In announcing the sale of StaffMark, the company announced:

“With this transaction, CODI has now realized more than $185 million in gains since going public in May 2006. As in the past, we intend to utilize the proceeds from the sale of Staffmark to further strengthen our balance sheet and take advantage of both internal and external opportunities, while maintaining the ability to provide attractive distributions to our owners.”

So yes, almost half of their gains over a five year period came from one deal — which is the nature of private equity, I suppose, but it’s much more magnified for a company like Compass Diversified Holdings that tries to build up and sell niche companies in such a concentrated fashion, and that holds each company for a number of years … they’ve only exited five investments since going public, so that averages out to one per year.

This sets them apart from the typical Business Development Company (BDC) that offers smaller tranches of equity and mezzanine lending to often dozens or even hundreds of companies of similar size and focus (Compass is not a BDC, though they trade similarly to one because of their large dividend). Compass is actually, like Blackstone and Carlyle, considered a partnership for tax purposes, so they’ll send investors a K-1 form that causes a slight bit of tax reporting complication (though they say they’re not late to do this like many MLPs can be, they got it out in late February this year). That means, like BDCs or MLPs or REITs, that I presume you wouldn’t get the low dividend tax rate on these distributions, though it’s certainly possible that some of the distributions will be tax deferred (lowering your investment basis rather than consisting of earned income). Haven’t checked on any of that.

Compass is managed by the Compass Group, and they have the typical hedge fund manager fees — Compass Group gets 2% of book value as their annual management fee, and a 20% cut of any performance over the annual hurdle of 7%. Which isn’t bad, particularly considering that this fee is probably a large part of the management overhead and insiders hold a lot of shares, and the 7% hurdle seems reasonable to me. They have plenty of room to borrow more money for future acquisitions and quite a bit of cash on the books thanks to the last two sales of portfolio companies, so I would assume they’ll be making some acquisitions this year if they can find attractive niche companies to buy. The basic information on the company and their portfolio subsidiaries is in their presentation from March here if you’d like a quick overview.

Oh, and the dividend is better than 10% now — they just raised the quarterly payout to 36 cents. So this is an interesting little private equity firm that appears to go with the “actively manage just a few subsidiaries and grow them” approach rather than the “invest in 100 little firms to diversify” approach that most BDC’s follow (there are a wide variety of BDCs, but in general they target middle-market companies for mezzanine loans or private equity, and most have yields in the neighborhood of 7-10% these days), and they appear to have built a nice niche and definitely have some good cash flow and a couple solid investment successes under their belt, though they don’t appear to be in danger of becoming very fast or flashy at this rate. I haven’t looked at them very closely yet or sniffed around for skeletons, but there seems to be quite a bit to like.

So, is this your kind of investment? Have a reason why you like or dislike CODI or any of the similar big private equity shops or Business Development Companies? Let us know with a comment below.

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I’m going to wait and see what the summer brings. After all, operation twist will be ending, and Euro land seems to be getting worse. Otherwise I’d make sure you monitor you stops on this. A nice yield, could be a good one to buy.

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